A six-figure IRS penalty notice is not a hypothetical risk — it is a reality for employers who misunderstand their Affordable Care Act obligations. Since the ACA's employer provisions took full effect, the IRS has ramped up enforcement, issuing Letter 226-J notices to employers who failed to offer adequate coverage or who filed inaccurate information returns. If you employ 50 or more full-time equivalent workers, ACA compliance is not optional, and the details matter enormously. This guide breaks down exactly what is required, when it is due, and how to avoid the most common — and most expensive — mistakes.

Who Is Subject to ACA Employer Mandate Rules?

The ACA's employer shared responsibility provisions apply to Applicable Large Employers (ALEs) — organizations that employed an average of 50 or more full-time equivalent (FTE) employees during the prior calendar year. Calculating FTE status correctly is the first critical step, because part-time and variable-hour workers count toward the threshold on a proportional basis.

If your workforce hovers near the 50-FTE line, you cannot afford to guess. Miscounting your workforce and concluding you are not an ALE when you actually are exposes you to penalties for every month you failed to offer compliant coverage. Seasonal employees, workers from a staffing agency, and related entities under common ownership all factor into the calculation in ways that surprise many business owners.

  • Full-time employees work 30 or more hours per week on average.
  • Part-time hours are aggregated and divided by 120 to calculate monthly FTE equivalents.
  • Common ownership rules may combine employees across separate legal entities into a single controlled group for ALE determination purposes.

What Coverage Must ALEs Offer?

Being an ALE means you must offer minimum essential coverage (MEC) to at least 95 percent of your full-time employees and their dependents. But simply offering any health plan is not enough. The coverage must also satisfy two additional tests:

  1. Minimum value: The plan must pay for at least 60 percent of covered costs, as determined by the IRS minimum value calculator or an actuarial certification.
  2. Affordability: The employee's share of the premium for self-only coverage cannot exceed a set percentage of their household income. For 2024, that safe harbor threshold is 8.39 percent of W-2 wages, rate of pay, or the federal poverty line — employers typically use one of these safe harbors because actual household income is unknowable.

Failing either test means an employee may qualify for a premium tax credit on the ACA marketplace — and that triggers a potential employer shared responsibility payment (ESRP) from the IRS.

ACA Employer Reporting: Forms 1094-C and 1095-C

Every ALE must file annual information returns with the IRS and furnish statements to employees. This is where many employers stumble because the deadlines are firm and the forms are detailed.

  • Form 1095-C must be furnished to each full-time employee by March 3 of the year following the coverage year (2025 deadline for 2024 coverage).
  • Form 1094-C (the transmittal) along with all 1095-C forms must be filed with the IRS by February 28 if filing on paper, or March 31 if filing electronically. Employers filing 10 or more returns are now required to file electronically under updated IRS rules.

Each 1095-C requires line-by-line codes that describe the type of coverage offered, the employee's share of the premium, and the reason for any months without an offer. Incorrect codes are one of the leading causes of IRS penalty notices, even when the employer did in fact offer compliant coverage.

Key reminder: The IRS matches 1095-C data against individual tax returns. Errors do not just attract penalties — they can trigger audits and create problems for your employees during tax season.

ACA Penalties You Need to Understand

There are two categories of ESRP penalties, commonly called the 4980H(a) and 4980H(b) penalties:

  • Section 4980H(a) — the "sledgehammer" penalty: Applies when an ALE fails to offer MEC to at least 95 percent of full-time employees and at least one employee receives a marketplace premium tax credit. The penalty for 2024 is $2,970 per year, per full-time employee (minus the first 30).
  • Section 4980H(b) — the "tackhammer" penalty: Applies when coverage is offered but fails the affordability or minimum value tests, and at least one employee receives a marketplace credit. The penalty is $4,460 per year for each employee who receives the credit.

These amounts are indexed annually. For a mid-sized employer, a single year of non-compliance can result in penalties well into six figures.

How to Keep ACA Compliance Under Control

Staying compliant requires year-round attention, not a January scramble. Practical steps include tracking employee hours monthly, documenting affordability calculations, updating plan documents when premiums change, and building a reliable system for generating accurate 1095-C codes.

Many growing businesses reach a point where the administrative burden of ACA tracking, benefits administration, and IRS reporting exceeds their internal HR capacity. That is where working with an experienced Administrative Services Organization like Nomad Partners makes a measurable difference. We manage employer reporting obligations, benefits administration, and payroll compliance so your team can focus on running the business — not decoding IRS instructions.

If you are unsure whether your current process will hold up to IRS scrutiny, reach out to Nomad Partners today for a complimentary compliance review. Getting ahead of ACA obligations is always less costly than responding to a penalty notice.